World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Saturday, October 10, 2009

It seems that Rick is taking his inflation queues in the same way that Czar Point does – inflation in the things you NEED, Deflation in the things you OWN (or things you must finance or consider to be “investments”):

The Washington State economy has been relatively better off than some of the hardest hit areas. Our economy tends to lag the rest of the nation by about 18 months. This used to be due to our dependence on Boeing and the fact that the airline aircraft order cycle tends to be out of phase with business cycles due to the lag time. Now, of course, our economy is way more diverse with companies like Microsoft, Amazon, Starbucks, and other high tech companies as well, many of which now reside in Bellevue, just east of Seattle.

Incidentally, the Bellevue area still looks like a high tech boom town and is Washington State’s version of Orange County – you know, modern, clean and nice looking. I just drove the length of I-5 from LA to Seattle and can tell you that I-5 in California does not look as well kept as it did in the past. There are areas where the weeds are growing several feet tall on the shoulders and the freeway is noticeable deteriorating in certain areas, something that I’ve never seen before on I-5.

At any rate, I have read three articles in the local Puget Sound Business Journal lately that underscore how deteriorating credit conditions are finally impacting Washington State.

The first article states that retail sales have dropped the LARGEST AMOUNT IN HISTORY! In the second quarter of this year, retail sales, as measured by taxable receipts (again, not susceptible to manipulation), fell by a whopping 14% year over year! That’s an ACCELERATION from a yoy drop of 12.8% the first quarter, and a 10.8% drop in the quarter prior:

In the second quarter of 2009, Washington state taxable retail sales dropped 14 percent compared with the same time a year earlier; a quarterly decline so large that state officials said it set a new record.

Sales fell to $25 billion in the latest April-to-June quarter.

In the first quarter of 2009, sales fell 12.8 percent compared with the first quarter of 2008. In the fourth quarter of 2008, sales fell 10.8 percent compared with a year earlier. Those two quarterly drops are the second and third-largest declines since the 1974, when the state said reliable records began being kept.

Among the biggest declining industries in the latest quarter, retail sales from construction dropped 26 percent to $4.3 billion and motor vehicle and parts dropped 21 percent to $2.3 billion.

In Seattle, total taxable retail sales fell 13.1 percent to $3.8 billion in the second quarter.

This is the type of revenue hit that all municipalities are facing. Yes, they have the power of taxation, but buyers and holders of municipal bonds need to be paying attention. RISK is rising while at the same time the Federal government is artificially forcing interest rates down. This can and will eventually snap back – as interest rates rise, the price of bonds fall.

Now, please consider the percentage drops in taxable sales and compare them to the statistics being reported in such phony baloney statistics as Goldman’s ICSC or the Redbook who’s greatest yoy sales decreases are in the 4+% range. Why the discrepancy, and how can retail sales only be down 4% per year when imports are down 30%+ year over year?

Here’s the answer… just like the stock market indices, these “indices” are vulnerable to SUBSTITUTION BIAS. If you are measuring same store sales, for example, how does that “index” handle it when one of their store chains goes out of business? Why they are no longer counted, of course! So the index only counts companies that are still around and does not capture those that have gone out of business, just as the DOW Jones Industrials doesn’t capture the fact that only one of the original companies in the index, GE, is still in business and that ALL THE REST HAVE FAILED or been bought up by other companies. So, that’s why the sales tax data captures what is really happening in the economy and why those other reports are close to worthless.

The next article is related to imports and exports. The Port of Tacoma is one of the largest and busiest in the nation. They had been so busy that they planned on spending $1 BILLION on expanding the terminal! But now that’s on hold “until cargo volumes return:”

The Port of Tacoma has decided to shelve a $1 billion plan for a massive terminal and waterway development project until cargo volumes return.

The port announced Oct. 1 that it won’t build the planned $300 million, 168-acre terminal on the Blair Waterway for NYK Line, which is to start calling at the port in 2012.

The terminal project was just part of a $1 billion port development plan that included building roads, railway connections and a new terminal for Tacoma-based Totem Ocean Trailer Express Inc., which operates cargo vessels between Tacoma and Anchorage. All of these steps were necessary to develop the NYK terminal.

Tokyo-based NYK will still come to the port. It will share space with Horizon Line at the existing AP Moeller terminal directly in front of Port of Tacoma headquarters on the Tacoma Tideflats.

“I will be able to see their ships from my desk,” said Port of Tacoma spokeswoman Tara Mattina.

Totem Ocean Trailer Express Inc., also called TOTE, will stay in its current terminal on the Blair, she said.

The port decision was driven by declining cargo volumes, which are down 15 percent so far this year, coupled with a 20 percent increase in the cost of the larger development plan, Mattina said.

“This is one way to bring NYK without spending that money,” she said.

Last year, container volume at the port dropped 3 percent to the equivalent of 1.9 million 20-foot containers. The worsened slide this year could pull volumes down to 1.6 million containers for 2009.

In a statement, Port of Tacoma Executive Director Tim Farrell called the decision “an important step to balance supply and demand,” which leaves the port with room for “substantial growth” in the long term.

That’s $1 billion less that is not going to ripple through the local economy. Notice they don’t do the math for you to express how much container traffic is down this year… well, the .3 million of 1.6 million containers equal an 18.75% drop in container traffic this year, right in the same range that retail sales are down, how ‘bout that?!

The third article that caught my attention is related to both housing and the travel industry…

A big hole in the ground at Second Avenue and Pine Street in downtown Seattle, next to Macy’s parking garage, should be filled just in time for the holidays.

Connecticut-based Starwood Capital Group Global, which had planned to construct a luxury hotel and condominium tower on the site, mothballed the project when the economy soured. Starwood will start filling the excavation next week, according to a company spokesman. The firm will retain ownership of the property.

Work on the 23-story 1 Hotel & Residences stopped in the fall of 2007 after Starwood Capital failed to obtain construction financing on acceptable terms.

In a press release, Starwood Capital said, “As we wait for capital markets to stabilize sufficiently enough for us to realize our vision of building a world-class hotel and residences at the gateway to Seattle’s retail district, we are working in partnership with the city to ensure the property remains clean and presentable over the short-term at this important location.”

Starwood said its affiliate, Avstar Seattle LLC, the entity that owns the property, “remains committed to Seattle as an investment opportunity and has a vested interest in seeing downtown Seattle be successful.”

Starwood bought out its former partner in the project, Portland developer Paul Brenneke, in June 2008.

Note that it was only the middle of last year that Starwood took on this project and already they are abandoning it and filling in the foundation! Perhaps their “forecasts” were a little optimistic about the strength of the Seattle area?

All three of these stories show the result of a collapsing credit bubble. Consumer spending, port traffic, hotel/travel traffic… all way down. Down so far that the numbers no longer can justify the huge expense. $1 billion on just one port expansion? Last time I checked, a billion was still a lot of money. That money must come from somewhere, and that somewhere for local governments is usually through bond offerings. They don’t number out, and that’s because the price to build, just like subprime housing, has reached ridiculous heights on the back of cheap credit, the largest credit bubble in the history of mankind. DEFLATION is what’s required to bring the math back in line. Stop building ridiculous hotels, stop spending billions on port expansions, consumers stop spending money they don’t have and price will fall back in line with EARNINGS. This is the cleansing of misallocation that is CAUSED BY OUR OWN GOVERNMENT and their failure to regulate the creation of money.

Of course, if you peruse the Puget Sound Business Journal, you’ll find all kinds of articles and opinions by “experts” talking up the strength of the area and putting their naturally positive spin on the situation. The truth is that Washington State is not all that far behind California in relation to it’s size.

Here’s a local newspaper article from last year showing the massive deficits the State is running:

Washington's projected budget deficit has ballooned to $5.1 billion, nearly $2 billion more than predicted just two months ago.

That means when lawmakers convene in January to assemble the next two-year spending plan they'll have to drastically cut state programs or raise taxes, something Gov. Chris Gregoire has said she won't do.

"This will be ugly," said Rep. Ross Hunter, D-Medina, chairman of the House Revenue Committee. "It's much larger than I expected it to be."

Tax revenues are expected to drop $1.9 billion below the state's former projections, meaning a possible doomsday for some programs -- and substantial belt-tightening just about everywhere else.

In September, the state's projected deficit for the 2009-2011 biennium was pinpointed at $3.2 billion. Now, not only has that deficit burgeoned to $4.6 billion, but the state's current budget is also suffering a $500 million shortfall.

The nation's economy has been widely blamed for Washington's growing deficit. As financial markets continue to experience record measures of volatility, consumers aren't spending like they used to -- and that means sales and real estate taxes aren't pouring into state coffers…

Let’s see… that’s $5.1 billion short of a $30 billion budget, hmmm…. The trusty calculator says that’s a 17% shortfall, once again the same exact range as the numbers we’re seeing in the articles above – HUGE! That $5.1 billion divided into the state’s 6.5 million people means that the one year shortfall equals $785 for every man, woman, and child ($3,140 for my family of four), for just the year 2008 and just for the state’s shortfall, not the local town and not the Federal Government, just the State.

And Washington State is certainly NOT alone. The following study was published just last week from the Center on Budget and Policy Priorities. It lists the current and forecast shortfalls for all the states including the years 2010 and 2011. Keep in mind as you see the horrific numbers in this report that those projections are forecasts which are proving to be wildly optimistic in their assumptions.

For the year 2010, 48 states are projected to run deficits and their income will fall short of their expenditures by a whopping 24% of their budgets, or more than $168 Billion, $350 Billion for 2009/2010 combined! Please spend some time looking at the table for your state, especially if you live in California…

California has a gapping hole – their government is much too big and it is sucking the life blood out of the California economy. The budget situation is so bad that they have resorted to issuing I.O.U.’s and using accounting tricks in an attempt to do anything but the right thing which is to shrink the size of government.

Even after all their latest tricks, their latest attempts at establishing a sustainable budget are simply falling way short. It’s simple… you must spend less than you take in. That is true for your personal budget, it’s true for a business’s budget, and it’s true for all government budgets despite what idiot Keynesian twisting politicians think or say.

Oct. 10 (Bloomberg) -- California Governor Arnold Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said.

Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.

“The culprit here appears to be estimated quarterly personal income tax statements,” H.D. Palmer, the governor’s budget spokesman, said yesterday. “The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications.”

The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.

Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November.

Debt Sales

The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.

California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided.

“If the market is inhospitable, we won’t go,” Lockyer said in an interview yesterday. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”

Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week.

Scaled-Back Offering

The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low.

California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.

U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.

California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.

Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.

“Everybody thinks there’s still an appetite for California bonds,” Lockyer said. “There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on.”

Interest rates begin to rise as “investors” begin to see the risk involved. If the risk becomes too high, they will simply stop showing up altogether and then the only solution left will be to either do the right thing and shrink the size of government, or to do the worst thing and that’s fall back on the lender of last resort, the Federal Government who is in worse shape than the State of California, the only difference being their ability to print money and to thus rob the American people of their productive efforts.

Printing money is not our government’s latest trick, it’s a time honored tradition that has brought down many governments throughout history…

…an excellent video from Tom Woods, the author of Meltdown, explaining the depression of 1920 and how the federal government's hands off approach led to a quick rebound. A must watch, with some explanation of the Austrian school of economics.

I agree with Joe, a great presentation by a very good speaker – well worth the time to watch. I will note, however, that I do not necessarily agree with the Misses Institute that a return to "hard money" (the gold standard) is necessary or appropriate.

Friday, October 9, 2009

Let’s start our examination of the most overvalued market in history by looking inside this week’s release of Monetary Trends courtesy of the St. Louis Fed:

First, let's note that although M2 rose in the past week, in terms of raw money, total M2 and the larger measurement, MZM, are both pointing down at this time, no longer up:

Last week I showed that the velocity of money is at historic lows and this week I want to again show the chart of the Monetary Base Velocity Growth… as the Fed pours money into the system, the velocity of that money has crashed:

Total Loans and Leases at Commercial Banks as well as Commercial and Industrial Loans are in NEGATIVE territory. This is what the Fed is attempting to fight by forcing more money into the system. The reason the money pumping doesn’t go anywhere is that the entire financial system is saturated with debt.

Those who underestimate the importance of consumer credit are destined to repeat the same mistakes as those who believed that subprime would not infect the rest of the economy – that’s because it was a SYMPTOM of a much larger debt and corruption/fraud problem. Note the drop in Consumer Credit, it is accelerating downward. Meanwhile NONFINANCIAL Commercial Paper is collapsing at a MINUS 40% YOY RATE!!

Now, let’s talk about market valuations – Price/Earnings. This is a very basic and simple ratio – simply put the PRICE of the stock overtop the Earnings to develop a simple ratio. When you do that for the entire S&P 500, you come up with the most overvalued market in history:

Note the date of that chart, it is current as of this week. Still near 140, the P/E has turned down slightly from the high last month. There are two ways to get this ratio down… one is for the PRICE of stocks to go down, and the other is for earnings to go up. The bulls are arguing that earnings are going to go up while the bears are arguing that the price is going to come down. Reality will almost always be found in the middle, but it will most certainly not be found here at a P/E of 140!

David Rosenberg, now at Gluskin & Scheff, just published an outstanding article describing the different price to earnings ratios and the arguments presented by both the bulls and the bears. Anyway you want to measure it, whether it be by looking at hopeful mark-to-fantasy future earnings or by looking at current or trailing earnings, this market is overvalued!

I’d like to point out something Rosie didn’t… namely that what earnings we currently show ARE FALSE EARNINGS made primarily on the back of the financial industry and their MARK-TO-FANTASY, Congressionally supported, Corporate money financed, Enron like, TOXIC WASTE, bonus generating, FALSE PROFITS.

Hey, you can believe whatever you want and invest your money wherever you please. You can take to the bank, however, that the market WILL return to historical ratios.

When does that correction finally begin? Here’s a clue… LQD, the iShares Investment Grade Corporate Bond Fund, has been growing non-stop since the equity market bottomed back in March on a perfect rising trendline. That trendline just broke to the downside meaning higher interest rates.

As interest rates rise, the PRICE of bonds fall. This fund grew from $65 in 2002 to over $106 at its peak last week. The Fed has set the Federal Funds rate at zero and has flooded the market with liquidity and quantitative easing to artificially hold rates down. Now Australia and a few other wise countries are beginning to raise rates yet we’re trying to hold fast, after all we need to keep the appearance of a healthy economy up, don’t we? Well, rates will not remain below historic norms forever, that broken trendline is a clue, it is talking to you, are you listening?

I’m going to grant you that in the past rising rates have meant that money is flowing out of the bond market and into equities. What is different about now from the past? DEBT, that’s what.

As rates rise with debt saturation, the cost to carry that debt skyrockets. It’s what Bernanke is fighting and it’s a battle that will eventually be lost, there’s no way around it, to include devaluing our money.

The dollar jumped on Bernanke’s comments that as the economy picks up he’ll have to raise interest rates. No kidding? Who could have thunk it? Of course the whiff of higher rates sent the dollar higher… why did he make those comments now? Because the dollar was breaking key support and he has to give lip service to our “strong dollar policy” while at the same time destroying it in actual practice. These type of things always happen when the sentiment gets leaning too strong in one direction. I read that the bearishness on the dollar has never been higher, something like 97% of analysts are bearish on the dollar and that is a sure recipe for the dollar to increase. Oil, gold, and bonds are all down as a result.

Analysts are expecting inflation too, and while I think they get it in the long run, they won’t in the short run.

The international trade figures for August were released this morning. They show a contraction in the deficit, one of the true good benefits of the current recession. Imports are still falling showing weak demand inside the U.S., but exports are picking up just slightly but still down huge year over year:

HighlightsThe U.S. international trade deficit shrank in August on both lower oil and consumer goods imports, reflecting a still sluggish economy. Exports, however, did edge rise, largely on industrial supplies, services, and auto shipments to Canada. The overall U.S. trade gap unexpectedly narrowed to $30.7 billion from a revised $31.9 billion shortfall in July. The August deficit was much smaller than the market forecast for a $33.0 billion differential. In the latest month, exports improved by 0.2 percent while imports declined 0.6 percent. The shrinking of the trade deficit was due to a narrower petroleum shortfall which came in at $16.5 billion compared to $17.8 billion the previous month. The nonpetroleum gap expanded to $24.3 billion from $23.6 billion in July.

The improvement in the trade deficit was due to both a rise in exports and a dip in imports. While exports were up 0.2 percent, there were divergent trends in components. Goods exports actually declined 1.6 percent but would have been up were it not for a sharp decline in civilian aircraft exports. Nonetheless, exports of industrial supplies and autos were up significantly. Also, services exports were up on the "other transportation" component which includes items such as business, professional, and technical services, insurance services, and financial services.

Imports fell on lower imports of crude oil and consumer goods. The narrowing in the petroleum deficit was due to fewer barrels brought in as the price of imported oil rose to $64.75 per barrel from $62.48 in July. Year-on-year, overall exports rose to minus 20.7 percent from minus 22.2 percent in July while imports improved to down 28.6 percent from minus 30.3 percent the prior month.

Overall, the August trade data show modest improvement in real terms and will add slightly to third quarter growth. The dollar should firm on the numbers and equities should like the export gain.

Before this crisis began we were running deficits in the $60 billion a month range, now they have been cut in half. That’s exactly what the invisible hand is supposed to do, and it’s not done yet despite the government fighting it.

The 60 minute stochastic is overbought and in need of a correction. Note that prices yesterday could not stay over the 1,070 level but they did close above the 1,061 pivot. The next higher pivot is 1,090 and the next lower support is now 1,041.

The Nobel committee has finally lost it completely by awarding Obama the Nobel Peace Prize for his efforts at international peace. This for a person who swore that the first thing he would do is exit the U.S. from two wars and who instead has done nothing but increase troop numbers overseas and increased spending on the military industrial complex that was already insanely out of control. The Nobel committee, of course, had already lost it when they awarded Krugman the prize for his “work” in economics. Mass psychosis is all I can say.

NEW YORK (MarketWatch) -- California had to raise the yield on Thursday offered to investors to entice enough people to buy its tax-exempt and taxable bonds, an originally intended $4.5 billion sale that analysts had expected to go smoothly. Bond traders said the state offered 20-year tax-exempt debt on Thursday at 5%, up from 4.63% on Tuesday. After two days of orders from retail buyers, the state treasurer's office said it took orders from retail buyers for 33% of the tax-exempt portion and 31% of the taxable debt, less than half the demand seen at the state's short-term note sale last month. On Thursday, the amount of tax-exempt debt remained at $1.3 billion, while the state told investors that $2.9 billion in taxable debt would be sold.

As investors look at the destruction of our own currency by our own government, they realize that 4.63% just isn’t going to cut it over the next 20 years, especially for a state in such dire straits as California. With the Fed artificially holding rates at zero, there is but one way left for interest rates to move.

Of course California is not as privileged as the Fed and Treasury who work in concert with the Primary Dealers to backstop their debt issuance with phony bids and money from nothing. This same situation will catch up the Federal Government, it’s just a matter of time.

Those holding municipal and State bonds had better be paying attention. When rates rise, the PRICE of bonds fall. To obtain PRICE appreciation, one should buy bonds when rates are high and sell when rates are low.

Many of you are probably wondering why stocks would be up strongly on a day with an event like this. Well, think about the flow of capital… higher interest rates drives money from bonds and if the dollar is going to be devalued, then owning equities makes more sense. Be careful, though, as timing is everything and once everyone believes that to be true the exact opposite will happen in the short term and that’s why it usually takes longer for the obvious to play out.

Once a debt saturated society has pulled ALL of their future income into the here and now, they is no more income to support even more debt. Thus investors demand higher interest rates. That equals FAIL in the bond world. EPIC FAIL is the next step, that’s when there are no bidders at any price! Hey, money’s for nothing get your chicks for free!

Equity futures are substantially higher this morning following earnings from Alcoa yesterday:

The dollar dropped dramatically, testing the 76 level and even sending a probe down to 75.68. If the 76 level breaks, the next support isn’t until the 72ish range, a large move that could happen fairly quickly. Gold is higher, touching $1,060 overnight, and oil is hovering around the $70 a barrel range, but dropping just prior to the open.

Alcoa's earnings were an improvement quarter over quarter (down 30% yoy), but there's a caution point here in that their increased revenues came solely due to higher prices for aluminum and it looks as though their total throughput of aluminum was actually down substantially. That may indicate weaker demand than the price is reflecting and, of course, most analysts did not pick up on it.

Weekly initial unemployment claims fell to a much cheered level of “only” 521,000, the lowest level in 9 months and yet still a total disaster. Here’s the spin, long live the king:

HighlightsFewer workers are filing for unemployment claims in what is encouraging news for the economic outlook. Initial claims fell significantly in the Oct. 3 week, down 33,000 to a 521,000 level that is much better than expectations (prior week revised 3,000 higher to 554,000). The four-week average is at 539,750, down 9,000 in the week. Continuing claims also fell, down 72,000 in data for the Sept. 26 week to 6.040 million. The unemployment rate for insured workers, as high as 5.2 percent in June, slipped another tenth in the week to 4.5 percent. Levels in this report are at their lowest since the first quarter. Initial reaction was very limited, perhaps because improvement in this report during September didn't pan out to improvement for the monthly employment report.

Meanwhile Congress is wrestling with extending benefits a whole 4 weeks as a record number of unemployed fall off the backside of benefits and are simply no longer counted. It always hurts to remember that the U.S. now employs fewer people in manufacturing than we did prior to WWII.

And speaking of wars, the “war” in Afghanistan now has gone on for more than 8 years, TWICE AS LONG as WWII! I’ll never forget listening to Obama give a speech in Seattle, pre-election, where he was talking about ending the wars being his first priority. Once elected, however, his first priority became funneling more money to the central banks to “get credit flowing again!”

From a technical perspective, it would appear that we completed the first 4 subwaves of wave 1 up of 5 up of c up of B up yesterday. The overnight ramp may have been wave 5 up (or it may finish up today), so I expect wave 2 down to begin soon and it should be followed by another strong push higher for wave 3 up.

There was a very small movement on the McClelland Oscillator yesterday meaning that a large move is coming either today or tomorrow. With prices overnight clearing the 1,061 pivot, it becomes support with 1,041 being the next level of support and now 1,090 is overhead. Should 1,080 be breached, then the fifth wave will have made another high taking the failed fifth wave scenario off the table.

Consumer credit came in at minus $12 billion for the month of September. Here is the updated TOTAL consumer credit chart clearly showing that consumer credit is shrinking:

Wednesday, October 7, 2009

A Long and interesting piece on Martin Armstrong… Paumgarten was the first from the media to be allowed to interview Armstrong in quite some time. He interviewed me for this article and used some of my terminology, but did not quote me or this blog. He makes oblique reference to how Martin gets the documents out into public, but was never given the answer he was looking for and so talks about Zero Hedge instead of the only site on the web to publish every work he produces. C'est la vie, it’s still a comprehensive and interesting read, especially for those who do not know the history behind Martin Armstrong and his work.

Here Martin first states no grand conspiracy theory but then goes on to describe in great detail his own dealings with the “club.” While I agree with Martin that many who just can’t understand what’s happening have to put a label on it, like “conspiracy,” I also see that all the manipulations add up and do get out of control. Goldman, while maybe not intentionally setting out to indebt the world, or JPM not setting out to be the world’s largest holder of derivatives have, in fact done so. They now permeate the world with their debt and toxic derivatives. Conspiracy or accidental idiots, the end result is the same.

The bottom line from my perspective is who and when do reasonable men step in to place limits on their activities?

LOL, I love that title, and it’s EXACTLY what I’ve been saying all along. It takes him awhile to get to the actual math, talking first about the legal system again and history leading up to our unworkable math situation. He then goes on to talk about timing, pointing out possible windows for when the true crisis of debt will hit, the years 2011 or 2015 seem to fit his cycle theory.

Don’t miss what he’s saying on the last page… interest rates are destined to rise, that is true.

Armstrong jumps into this key argument, first discussing why deflation occurred during the Great Depression and why this time may be different. Yes, he is falling into the inflationary camp seeing confidence waning in our dollar. He states that during the Great Depression European countries flocked to the dollar as currencies in Europe failed.

Is that not happening today? Latvia is just making headlines as I type?

While I completely agree that our dollar is destined to the dustbin of history, its demise is a matter of timing. I am going to once again point to the shadow banking system and the current unwinding of debt and leverage. That unwinding is NOT over and government efforts have NOT completely stopped the collapse of credit. Like Jim Sinclair, Martin will eventually be right on this call, I just don’t believe that time is now. Still, an interesting read, his history perspective is always educational.

It’s been awhile since I did an article showing the latest revised charts by the St. Louis Fed. So, here is a collection of charts showing the underpinnings of our economy. Please pay attention to the left hand scale of the chart as some are expressed in raw billions while others are expressed in year over year (yoy) percent change.

BANKING & CREDIT:

Return on average equity for banks with assets from $1B to $15B... these are middle sized banks, both the larger and smaller banks charts show the same type of picture. So, where are the real bank profits? The only profits they are actually making is on paper, the result of mark to fantasy accounting because the FASB caved into pressure from Congress who in-turn caved into pressure from the central bankers:

Total net loan charge offs… this is for all loans. Still no greenshoots here, the banks have been reticent to write off bad loans. They are still holding inventory in hopes of price recovery that will never happen and thus the end of charge offs is nowhere near complete as the trajectory of this chart clearly shows:

Of course, the number of loans not performing is skyrocketing and is NOT letting up:

Revolving credit (primarily credit cards) is down significantly in terms of raw dollars… total consumer credit comes out this afternoon:

I’ve gone over what ALLL is before… it’s the Allowance for Loan and Lease Losses. The higher the allowance the better, low is bad… and right now the allowance for losses has never been smaller! This chart is for banks over $20 billion, ALLL is in the gutter meaning that banks do not have the cushion normally required. No surprise, then, that banks are failing. Where are the regulators and what are they doing? Good question:

GOVERNMENT:

Federal Government receipts are down… big time. This is the nation’s INCOME from all sources:

And yet to compensate what does our government do? Well, they believe that economic rules and math does not apply to them or the central banks, it only applies to us sheeple who eventually get taxed or robbed via the crashing value of our money. So, as our income is plummeting, our expenses are skyrocketing thanks to Economic Mass Psychosis:

Of course with income down and expenses up, what does that do to our government’s savings? Oh yeah, that’s what happens…

INTERNATIONAL TRADE:

I like looking at import and export figures as a sign of economic activity as the numbers are not YET susceptible to massaging and manipulation unless you look at anything labeled “REAL.” Real means that it has been adjusted for inflation… what kind of inflation? The trumped up government kind, and those numbers are thus not reliable to reflect reality.

Let’s start with imports… are they looking any better? How about a 30% crash in yoy percent change? Greenshoots, really?

And just to throw in the “real” dollar figure for exports (in “chained” dollars, of course), you will see yet another parabolic curve and subsequent collapse as math and nature dictate that all exponential math collapses in the real world:

And Exports? Below is a chart of exports in raw billions of dollars. Note the classic parabolic shaped curve and subsequent collapse. Is it over?

Here is the same chart expressed in yoy % change. Down more than 20% with still no recovery whatsoever:

Still, note that exports have not fallen as much as imports. That means that our country’s demand is falling more than demand in the rest of the world. It also means that our negative balance of trade is coming in somewhat.

HOUSING:

Oversupplied and overpriced, the housing correction continues but is migrating now to the more expensive homes financed primarily with option ARM loans. Those resets are in the pipeline and we are beginning to see them pick up already. Meanwhile, before a house can be built it must receive a permit. Permits have fallen to levels not seen in modern history and that’s a good thing as adding inventory to an oversupplied situation is not appropriate:

Housing starts are likewise still at historic lows:

The real question to ask in regards to housing is, “Do incomes support current rents?” This ratio is still out of whack, but is getting close in some areas. The problem I have with all of it is that I include the caveat, WITH NORMAL and CONVENTIONAL FINANCING. Can your income support a new house WITH NORMAL AND CONVENTIONAL FINANCING? Is financing normal when the Fed has interest rates artificially set at zero? What happens to affordability and thus prices when interest rates normalize?

EMPLOYMENT:

Joe made a terrific chart showing cumulative job losses since the end of ’07. The blue line represents jobs lost per month and the red line is cumulative. Nearly 8 million jobs lost in less than two years. This pulls massive amounts of personal income out of the economy and also pulls massive tax revenues out as well:

The civilian employment population ratio continues to erode and is on a slope pointing due south:

The number of hours worked in manufacturing continues to plummet:

PERSONAL FINANCIAL HEALTH:

The consumer represents about 70% of the economy, so how are we looking? Personal income is decreasing at nearly a 3% rate:

With unemployment rising and wages down overall, the total amount paid out in compensation is FALLING:

This is reflected in income receipts:

And it’s also reflected in personal consumption spending:

Consumption of both Durable and Nondurable Goods is falling:

Ironically, despite falling overall incomes, personal savings are rising. This is somewhat misleading as consumers who pay off debt are counted as “saving.” We don’t know, for sure, how much is debt repayment and how much is actual savings.

Here’s one clue, however, to the savings puzzle. While “savings” as reported above are climbing, unemployment is skyrocketing. How do unemployed people save? They don’t. And that’s why total GROSS savings are falling despite the increased savings rate. That might help to tell us that most, if not all, of the increased savings rate is actually debt repayment:

CORPORATE HEALTH:

With the stock market rising non-stop since March, surely investors are pricing in increased earning to justify the current 150+ price to earnings ratio, right? We’re about to find out, but earnings to be in historic norms will have to increase a mathematically impossible amount, so don’t look for that P/E ratio to return to historic ranges anytime soon UNLESS the PRICE corrects… hmmm.

Corporate profits have enjoyed the boom times of money creation growing at an exponential rate, resulting in a parabolic mark-derivatives-to-fantasy blow off top and subsequent collapse. Then, to kick off this rally, FASB changed the much more realistic mark-to-market rules back to mark-to-fantasy, and wallah, the financials are back to “profits.” Those profits are not real and they will NEVER be recognized in reality. Meantime, people like Bank of America’s CEO, Ken Lewis, walks off with more than $40 million in personal ill-gotten gains at the expense of Americans who rightly own the central banking function from which he manipulated and stole.

One reason to own stocks is to share in the profits of the company. Those profits are paid out in the form of dividends. Dividends, however, have plunged to follow alongside of plunging profits and are down 20% year over year!

Corporate profits are down, and so too is proprietor’s income:

Sales are down as indicated by final sales of domestic products:

And sales to DOMESTIC purchasers is down even more, once again showing that demand from within the U.S. is down more than demand in the rest of the world:

Of course inventories have been plummeting to correct for weak sales. Many believe that inventories were adjusted too far downwards and that rebuilding those inventories will lead to an increase in manufacturing. And, in fact, the manufacturing ISM just recently turned positive for the first time since this crisis began. Does that mean that it’s going to stay positive? We’ll have to watch inventories in conjunction with manufacturing and imports/exports, no sign yet of an inventory recovery:

Those are all recently revised charts that caught my attention, there are literally thousands at the St. Louis Fed’s website. It’s very difficult to put together an argument that the ECONOMY is recovering from my perspective. It’s also difficult to put together an inflation argument except for the money aggregates. Money aggregates do not capture what is happening to the shadow banking world of derivatives and leverage. It’s still my contention that deflation is occurring now despite the best efforts of governments to continue never-ending fantasy growth via inflation. The only thing they will be successful at in their efforts is to devalue the dollar and to destroy confidence in our entire monetary system and system of governance that has truly become a system of the corporation for the corporation.

The stock market IS NOT an indicator of anything other than the big players manipulations in the current condition. Those who claim economic recovery are looking at the markets and not at the real economy. The real economy will eventually catch up to the purveyors of paper engineering, and when it does…